Principles of Pricing Summary

Principles of Pricing Summary

The marketer who can accurately capture and communicate the value of its products/services to the consumers ultimately wins in the highly competitive market place and stands apart from its competitors. But ultimately the company needs to make bring in revenues from its products/services and, most important of all, generate profits and improve its margin. That’s when pricing, the fourth of the 4Ps, comes into play. In formulating the appropriate pricing strategy, the marketer needs to price its products/services in such a way that the value offered through its use is captured in the price.

Most companies go for the cost-plus pricing which often ignores this fact and lot of money is left on the table due to its adoption. To fully exploit the profit opportunities, the marketer should consider value based pricing approach that quantifies the value of the benefits that the consumer gets through its use. Here, it is important to draw the distinction between objective value and the perceived value. These values are very close if the product’s benefits can be easily seen by the consumer. However, the perceived value might be less if the marketer has to aggressively communicate those benefits to the consumer. COGS also factors into the pricing approach that the companies decides to choose, as any company would charge more than COGS to earn profit for itself. In that case, the ideal sweet spot would be between perceived value and the COGS. In this way both parties benefit, as the value is shared between the firm and the consumer.

To begin any pricing strategy exercise, it is important to estimate the objective value or the true economic value (TEV) of a product to the consumer. It’s a sum of next-best alternative cost and value of the performance differential that the product offers over its competition. Along with TEV, measurement of perceived value of the product is also critical. The best way to measure is through surveys and analyzing the responses. This method, however, has some pitfalls- they could have a non-payment bias where the respondents’ response is affected by the fact that they don’t have to actually buy the product. The next step is pricing strategy formulation is assessing price sensitivity across different customer groups, time and product categories. The price sensitivity is affected by several factors such as magnitude of price increase, the party paying for the increase, the competitive landscape and the value variation across different classes of consumers. When there is value variation, price customization would be the best approach where those who value the product more can be charged higher price.